The company was founded in 1982 as Ultimate by the brothers Tim and Chris Stamper and initially concentrated on developing for the Spectrum Sinclair. Later, the company shifted focus to Nintendo's consoles and handhelds, and Rare was set up as a specialised subdivision in 1985. The Ultimate distribution rights were later sold off to publisher US Gold. In 1995, Nintendo bought a 25% stake in the company, which it later expanded. Although all its games were still distributed by Nintendo, Rare has started to self-publish select titles with 1997's Diddy Kong Racing (N64).

In what has to be one of the biggest acquisition coups in modern gaming history, Microsoft bought Rare in September 2002 when Nintendo elected not to renew its close ties with the developer.