diff --git a/internal/instance/resource_instance.go b/internal/instance/resource_instance.go
index 45e230ac..25a51255 100644
--- a/internal/instance/resource_instance.go
+++ b/internal/instance/resource_instance.go
@@ -82,9 +82,6 @@ func (r InstanceResource) Schema(ctx context.Context, _ resource.SchemaRequest,
 		Attributes: map[string]schema.Attribute{
 			"name": schema.StringAttribute{
 				Required: true,
-				PlanModifiers: []planmodifier.String{
-					stringplanmodifier.RequiresReplace(),
-				},
 			},
 
 			"description": schema.StringAttribute{
@@ -789,13 +786,25 @@ func (r InstanceResource) Update(ctx context.Context, req resource.UpdateRequest
 		return
 	}
 
-	instanceName := plan.Name.ValueString()
+	instanceName := state.Name.ValueString()
 	instanceState, _, err := server.GetInstanceState(instanceName)
 	if err != nil {
 		resp.Diagnostics.AddError(fmt.Sprintf("Failed to retrieve state of instance %q", instanceName), err.Error())
 		return
 	}
 
+	// Handle instance rename if instance is already stopped.
+	newInstanceName := plan.Name.ValueString()
+	if instanceName != newInstanceName && isInstanceStopped(*instanceState) {
+		err := renameInstance(ctx, server, instanceName, newInstanceName)
+		if err != nil {
+			resp.Diagnostics.AddError(fmt.Sprintf("Failed to rename instance %q", instanceName), err.Error())
+			return
+		}
+
+		instanceName = newInstanceName
+	}
+
 	// Indicates if the instance has been just started.
 	instanceStarted := false
 	instanceRunning := isInstanceOperational(*instanceState)
@@ -832,6 +841,17 @@ func (r InstanceResource) Update(ctx context.Context, req resource.UpdateRequest
 		}
 	}
 
+	// Handle instance rename.
+	if instanceName != newInstanceName {
+		err := renameInstance(ctx, server, instanceName, newInstanceName)
+		if err != nil {
+			resp.Diagnostics.AddError(fmt.Sprintf("Failed to rename instance %q", instanceName), err.Error())
+			return
+		}
+
+		instanceName = newInstanceName
+	}
+
 	// Get instance.
 	instance, etag, err := server.GetInstance(instanceName)
 	if err != nil {
@@ -1307,6 +1327,17 @@ func stopInstance(ctx context.Context, server lxd.InstanceServer, instanceName s
 	return true, nil
 }
 
+// renameInstance renames an instance with the given old name to a new name.
+// Instance has to be stopped beforehand, otherwise the operation will fail.
+func renameInstance(ctx context.Context, server lxd.InstanceServer, oldName string, newName string) error {
+	op, err := server.RenameInstance(oldName, api.InstancePost{Name: newName})
+	if err != nil {
+		return err
+	}
+
+	return op.WaitContext(ctx)
+}
+
 // waitInstanceNetwork waits for an instance with the given name to receive
 // an IPv4 address on any interface (excluding loopback). This should be
 // called only if the instance is running.
diff --git a/internal/instance/resource_instance_test.go b/internal/instance/resource_instance_test.go
index 0b9452f6..4422305f 100644
--- a/internal/instance/resource_instance_test.go
+++ b/internal/instance/resource_instance_test.go
@@ -216,6 +216,62 @@ func TestAccInstance_restartVirtualMachine(t *testing.T) {
 	})
 }
 
+func TestAccInstance_renameInstance(t *testing.T) {
+	instanceNameA := acctest.GenerateName(3, "-")
+	instanceNameB := acctest.GenerateName(3, "-")
+	instanceNameC := acctest.GenerateName(3, "-")
+	instanceNameD := acctest.GenerateName(3, "-")
+	instanceNameE := acctest.GenerateName(3, "-")
+
+	resource.Test(t, resource.TestCase{
+		PreCheck:                 func() { acctest.PreCheck(t) },
+		ProtoV6ProviderFactories: acctest.ProtoV6ProviderFactories,
+		Steps: []resource.TestStep{
+			{
+				// Launch a new instance.
+				Config: testAccInstance_rename(instanceNameA, true),
+				Check: resource.ComposeTestCheckFunc(
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "name", instanceNameA),
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "status", "Running"),
+				),
+			},
+			{
+				// Stop and rename the instance.
+				Config: testAccInstance_rename(instanceNameB, false),
+				Check: resource.ComposeTestCheckFunc(
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "name", instanceNameB),
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "status", "Stopped"),
+				),
+			},
+			{
+				// Rename the instance while stopped.
+				Config: testAccInstance_rename(instanceNameC, false),
+				Check: resource.ComposeTestCheckFunc(
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "name", instanceNameC),
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "status", "Stopped"),
+				),
+			},
+			{
+				// Rename and start the instance.
+				Config: testAccInstance_rename(instanceNameD, true),
+				Check: resource.ComposeTestCheckFunc(
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "name", instanceNameD),
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "status", "Running"),
+				),
+			},
+			{
+				// Ensure instance rename fails when instance is running.
+				Config: testAccInstance_rename(instanceNameE, true),
+				Check: resource.ComposeTestCheckFunc(
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "name", instanceNameD), // Ensure name is unchanged.
+					resource.TestCheckResourceAttr("lxd_instance.instance1", "status", "Running"),
+				),
+				ExpectError: regexp.MustCompile("Renaming of running instance not allowed"),
+			},
+		},
+	})
+}
+
 func TestAccInstance_remoteImage(t *testing.T) {
 	instanceName := acctest.GenerateName(2, "-")
 
@@ -1884,6 +1940,16 @@ resource "lxd_instance" "instance1" {
 	`, instanceName, acctest.TestImage)
 }
 
+func testAccInstance_rename(name string, running bool) string {
+	return fmt.Sprintf(`
+resource "lxd_instance" "instance1" {
+  name    = "%s"
+  running = %v
+  image   = "%s"
+}
+	`, name, running, acctest.TestImage)
+}
+
 func testAccInstance_remoteImage(name string) string {
 	return fmt.Sprintf(`
 resource "lxd_instance" "instance1" {