The deal with Rheinmetall BAE Systems Land (RBSL) will see 148 of the service's 227 Challenger 2 main battle tanks upgraded to Challenger 3s.
The remaining Challenger 2s will be retired.
The Ministry of Defence (MOD) is already predicting that the new tanks will be "the most deadly in Europe" in a significant leap forward from their predecessor.
But, with such big expectations how does the new generation measure up to the Challenger 2 and what improvements have been promised?
In terms of weight, the Challenger 2 and 3 are similar with the newer model weighing in at 66 tonnes, just one tonne more than its previous iteration.
Both tanks are similar sizes, intended for four-man crews, the traditional setup of a commander, a gunner, a loader and a driver.
One of the most obvious upgrades on display is the upgraded tank's available sighting systems.
Challenger 2 only had a single thermal imager, whereas its more modern counterpart will have two independent new thermal imagers and fully integrated automatic target tracking, wide-area search and assisted target detection.
Challenger 3 will also have a new driver's sight with front and rear thermal imager cameras.
Ammunition, main armament and turret structure
Challenger 3 boasts an all-new turret and new main armament, a 120mm L55A1 smoothbore and the latest generation programmable ammunition (high explosive and kinetic energy), bringing the new model in line with the NATO standard.
Its all-new turret can be fitted to the tanks of allies and global partners.
This is a significant improvement over the Challenger 2 which had an L30 rifled bore gun as well as an original turret, limiting the distance it could fire and its overall effectiveness in battle zones.
In terms of survivability, the Challenger 3 tank is also vastly improved between generations with enhanced armour, a new laser warning system and an active protection system option.
This is a leap forward over its previous iteration, as Challenger 2 has far fewer survivability features relying much more solely on its embedded special armour.
Watch: The expert's view on what the Challenger 3 will offer the British Army.
Mobility and engine efficiency
The Challenger 3 is also set to be much more mobile with the newest generation of hydrogas suspension and an upgraded engine with improved cooling, all adding up to a reduced through-life cost.
Not only was Challenger 2 less mobile, operating the previous generation of hydrogas suspension, but it also has a noticeably higher through-life cost, being less efficient and more expensive to run.
The Ministry of Defence says the new main battle tank will have a top speed of 60mph, compared to the Challenger 2's limit of around 37mph.
One of the most lauded changes is that the Challenger 3 tank will be fully digitised, with new features improving communication and data-sharing with other vehicles and ISTAR (intelligence, surveillance, target acquisition, and reconnaissance) assets, such as drones, during future deployments.
It will have generic vehicle architecture, an open system and new digital crewstations compared to Challenger 2's point-to-point bespoke architecture and a closed system, which can lead to integration conflicts.
In an interview with Forces News, Deputy Chief of the General Staff Lieutenant General Chris Tickell said that this greater data sharing capability will allow commanders "to identify the enemy" and "move that information seamlessly to other platforms".