Prince William and his wife Catherine have chosen to make the former apartment of Princess Margaret their permanent London residence, his office said on Sunday.
The pair, who married at Westminster Abbey in April to become the Duke and Duchess of Cambridge, will move into Kensington Palace in two years' time after major structural repairs have been carried out.
They currently use another smaller property in the palace when in the city.
William's late mother Diana, Princess of Wales, also had an apartment at Kensington Palace before her death in a Paris car crash in 1997.
The Duke is an Royal Air Force search and rescue helicopter pilot and currently works and lives with Catherine in north Wales when not carrying out royal duties.
Structural work will be carried out on the palace's heating and hot water systems as well as electrical wiring. Large amounts of asbestos will also have to be removed before they can move in.
The palace, remodelled by architect Christopher Wren who created St Paul's Cathedral, has been a royal residence since 1689. Princess Margaret lived there for more than 40 years until her death in 2002.
(Reporting by Avril Ormsby, editing by Mark Trevelyan)