The chapel was built around 1532 by Sir John Towneley (1473-1540) but was moved stone by stone from the north east side of the courtyard to the west corner of the north wing in the 18th century. This was around 1712 according to the family history recorded by T. D. Whitaker around 1800. The panel above the sacristy door is dated 1601 and contains the arms and crest of Richard Towneley and his wife Jane Ashton.
Mass continued to be celebrated here in disobedience of the law from 1559 until 1791 when Catholics were once again allowed freedom of public worship. For more than two hundred years Catholics had came from many miles around to receive Communion. By 1803, the congregation had increased so much that Charles Townley (1737-1805) lowered the ceiling to create a tribune above for the family, allowing the whole of the chapel below to be given over to the public. Finally in 1817, Burnley Wood Chapel on Todmorden Road was completed and Towneley once again became a family chapel.
For more on the history of the chapel see The Re-siting of the Chapel in Chapter Three of "An Architectural History of Towneley Hall" by W. John and Kit Smith, published by Heritage Trust for the North West in 2004.
In August 1905, the chapel and dining room were opened to the public as part of the museum. Having received advice from the Victoria and Albert Museum, the Sub-committee purchased plaster casts for display in the chapel. The plaster casts were slowly displaced by oak furniture over the next 60 years but the greatest change took place in 1968 when the Towneley Altarpiece was returned from the convent of Ashdown Park, Sussex.