Daniel Day-Lewis, who trained here, called it the most beautiful theatre in England. The Theatre Royal occupies a roughly rectangular site called Rackhay Yard, accessed through narrow passageways cut beneath the medieval King Street houses. The architect of record was the Bristol mason Thomas Paty, but the actual design came from James Saunders, David Garrick's carpenter at Drury Lane, who had also drawn up the theatre at Richmond, Surrey the previous year. The result is a debased Palladian façade with four Corinthian columns and an interior that wraps the audience around the stage on three sides, intimate enough to feel domestic, classical enough to feel grand. The Coopers' Hall next door, built 1743-1744, was joined to the theatre as a new foyer between 1970 and 1972. Together they form a single Grade I listed building.

When the theatre opened, English law made it nearly impossible to run an unlicensed playhouse outside London. The Licensing Act of 1737 restricted spoken drama to the patent theatres at Drury Lane and Covent Garden. So the Bristol proprietors did what every provincial theatre did. They billed their performances as a concert with a specimen of rhetorick, on the theory that a musical event with a few speeches was not a play. The fiction was a thin one and was eventually abandoned, although a production in the neighbouring Coopers' Hall in 1773 did fall foul of the law. Legal protection finally arrived when royal letters patent were granted by Act of Parliament. The building became a true patent theatre, took the name Theatre Royal, and could put on Shakespeare without pretending it was a recital.

By 1942 the building was decaying and its owners had put it up for sale. The fear was that Bristol's theatre would be lost. A public appeal raised funds and a new trust bought the building. In 1943 it was taken over by the London Old Vic and a new company, the Bristol Old Vic, was founded in 1946 as a regional offshoot. The artistic director was Hugh Hunt. Early members of the company included a young Peter O'Toole, who made his first appearance here in Major Barbara in 1956, along with John Neville, Timothy West, Dorothy Tutin and Barbara Leigh-Hunt. In 1954 the company gave the world premiere of Julian Slade and Dorothy Reynolds's musical Salad Days, which transferred to the West End and became the longest-running musical on the London stage at that time. The royalties from Salad Days bought the two Victorian villas in Clifton that became the home of the Bristol Old Vic Theatre School, opened in 1946 by Laurence Olivier.

In 2007 the trustees made the controversial decision to close the theatre for major refurbishment. Many in the profession feared the building would never reopen as a working theatre. A new board led by Dick Penny appointed Tom Morris from the Royal National Theatre as artistic director in 2009, and the Arts Council put in 5.3 million pounds towards a 19 million pound rebuild that ran from 2016 to 2018. The result kept the Georgian auditorium intact while opening up a new foyer onto King Street, exposing the old theatre walls that had been hidden behind 1970s cladding. Two graduates of the Theatre School each year now receive the Peter O'Toole Prize, a six-month contract, renamed after the actor's death in 2013. The school's alumni include the Academy Award winners Daniel Day-Lewis and Jeremy Irons. The theatre's reputed ghost, according to legend, belongs to the actress Sarah M'Cready. Visitors who have heard nothing else about the building have heard about her. On 30 May 2016 the Theatre Royal celebrated its 250th continuous birthday, the longest unbroken run in the English-speaking theatrical world.