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This palace was wholly built by wood and is also known as Istana Lembah (Valley Palace) and sometimes as Tepas Palace. This palace is situated near Iskandariah Palace and the building was planned after the big flood that befell Perak in 1926.

The carpenter who built this palace was Haji Suffian and his sons who hailed from Seberang Perai. This palace was completed in 1931. Sultan Iskandar Shah, the 30th Sultan Perak (1918 – 1938) moved into the palace because the Negara Palace, the official palace at Changkat Negara was to be demolished and replaced by the new palace (Iskandariah Palace).

In 1933, Sultan Iskandar Shah moved into Iskandariah Palace it was completed. Lembah Istana or Tepas Istana was lived in by Perak royal family.
The name Istana Kenangan was used in the 1960's, after the palace was renovated by the effort of Yang Teramat Mulia Tunku Abdul Rahman Putra Al-Haj, the first Prime Minister of Malaysia.

On 16 November 1966, Istana Kenangan officially became the Perak Royal Museum, until now.