Harry and Meghan had wanted to remain as working royals, although not prominent members, and become financially independent - a dual role many commentators said was fraught with problems.
But in a statement issued after royal family talks concluded, the Sussexes announced they will stop carrying out royal duties from the spring, no longer use HRH and will repay the taxpayers' millions spent on their Berkshire home.
Harry and Meghan said in their statement, issued on their behalf by Buckingham Palace, that under the agreement they understood they were "required" to step back from royal duties.
Earning money from lucrative contracts and still remaining active members of the monarchy would have been problematic, and has caused issues for royals who have tried to straddle the two positions in the past.
The deal is a hard "Megxit" for the couple - as the issue has been dubbed by the media - and a source told PA news agency "you can't be half in and half out".
The announcement marks the conclusion of talks about their future with senior members of the family and royal aides.
The Queen issued an emotional statement, saying she recognised the "challenges" they had faced over the past year, and added: "I want to thank them for all their dedicated work across this country, the Commonwealth and beyond, and am particularly proud of how Meghan has so quickly become one of the family.
"It is my whole family's hope that today's agreement allows them to start building a happy and peaceful new life."
The couple's spokeswoman issued a statement on their behalf saying: "As agreed in this new arrangement, they understand that they are required to step back from royal duties, including official military appointments.
"They will no longer receive public funds for royal duties.
"With the Queen's blessing, the Sussexes will continue to maintain their private patronages and associations.
"While they can no longer formally represent the Queen, the Sussexes have made clear that everything they do will continue to uphold the values of Her Majesty."
The Queen's statement included a personal tribute to the Sussexes with the monarch unusually using the first names of her grandson and his family in a public message.
She said: "Following many months of conversations and more recent discussions, I am pleased that together we have found a constructive and supportive way forward for my grandson and his family.
"Harry, Meghan and Archie will always be much loved members of my family.
"I recognise the challenges they have experienced as a result of intense scrutiny over the last two years and support their wish for a more independent life.
"I want to thank them for all their dedicated work across this country, the Commonwealth and beyond, and am particularly proud of how Meghan has so quickly become one of the family."
But Meghan's father Thomas Markle said the decision to split from the royal family was "disappointing" and "embarrassing".
Speaking in Mexico for a documentary for Channel 5, Mr Markle said Harry and Meghan were "destroying" and "cheapening" the royal family with their decision.
He added: "It's disappointing because she actually got every girl's dream, every young girl wanted to become a princess and she got that.
"And now she's tossing that away, for, it looks like she's tossing that away for money.
"Apparently 3 million dollars (£2.3 million) and a 26-bedroom home isn't enough for them. It's kind of embarrassing to me.
"This is like one of the greatest long living institutions ever. They are destroying it, they are cheapening it, making it shabby.
"They are turning it into a Walmart with a crown on it."
Meghan and Harry have already begun a transition phase of living in Canada and the UK. The duchess is in the Commonwealth country with son Archie where the Sussexes spent six weeks over the festive period.
The move was agreed by the Queen, Prince of Wales and Duke of Cambridge following the Sussexes unprecedented statement released earlier this month saying they wanted to step back as senior royals, become financially independent and live in the UK and North America.
It is understood the couple will now spend the majority of their time in Canada, with Harry expected to join his wife sometime this week.
The Sussexes keep the style of HRH - His or Her Royal Highness - but the statement issued on their behalf said it will no longer be used from the spring, "as they are no longer working members of the Royal Family".
Harry's mother Diana, Princess of Wales was stripped of her HRH in 1996 following her divorce from Charles.
The duke will continue to work with his charities and organisations like Sentebale - his Africa-based charity supporting youngsters with HIV - and the duchess will remain with her good causes.
The Rugby Football League said on Sunday that Harry will continue as patron.
In a statement, its chief executive Ralph Rimmer said: "We received a message from the Palace on Saturday explaining that the duke will continue to work with his patronages - as confirmed in the statements from her majesty the Queen and Buckingham Palace.
"We are delighted, and we look forward to the continuation of the relationship between the Duke and rugby league."
However, Harry will give up a Commonwealth role and his three military appointments, the most prominent being Captain General Royal Marines.
All the new arrangements are due to come into effect in the spring, and will be reviewed by Buckingham Palace in 12 months.