The Penarth-based former round-the-world yacht, which is crewed by volunteers and is an RYA training centre, won the award from the Association of Sail Training Organisations (ASTO) and the Maritime and Coastguard Agency (MCA).
Challenge Wales | Wales' Tall Ship is a 72 foot yacht which provides personal and social development training for young people aged 12 - 25 years to help them improve their employability skills.
Sail training helps young people to improve their teamwork and communication skills, discipline, teaches them respect and responsibility as well as develops self-confidence in a challenging yet positive 'can-do' environment onboard the Challenge Wales vessel.
Challenge Wales Trustee Vicky Williams explained, "It is an innovative programme which is all about using a former Global Challenge sailing yacht to develop personal skills and develop the employment prospects of young people.
"They are working in a difficult environment, developing decision-making skills, self confidence and self esteem.
"This could be a one day session for youth groups, but a lot of what we do is residential and we get a real chance to see young people develop.
"You can get qualifications through the RYA, we also work with the Duke of Edinburgh Award, visually impaired, young carers, disadvantaged young people and others looking for adventure, we have bursary funding to make what we do as accessible as possible."
The award came as a complete surprise to the Challenge Wales team at an industry event in Southampton and is thanks to the work put in by the volunteers who sail the boat.
The award is given for good management, safety, high quality sail training, volunteer management, innovations in the types of young people groups jumping aboard, maintenance management and how results are measured.
"We are members of ASTO and were awarded the UK Training Vessel of the Year Award at their annual industry conference. This came from the Maritime and Coastguard Agency as well as ASTO," said Williams.
"We have won several races and have the trophies for those, but this is the first award we have won, as a charity, in the eight years since we started.
"We work with a variety of groups and we get some great results which we are starting to track. We have seen young people come on board and then go into employment because of what they have done on Challenge Wales and how they have developed.
"The award is a tribute to our volunteers and it is so nice to be recognised by the industry for what we do. Our volunteers put in so many hours on all our voyages and give us so much time.
"This year we will be doing some tall ships racing in the Baltic and we have just had some lottery funding to work with disadvantaged groups, offering team building accreditation which are the equivalent of GCSE's through Agored Cymru."
Sir Alan Massey, CEO of the MCA said, "We chose Challenge Wales as this year's highly deserving winner as the vessel stood out for determination and resourcefulness of everybody involved with her to make a real, safe and lasting difference to the lives of the community in which she operates.
"We in the MCA were particularly impressed by the story of one of her voyage crew, an 18-year-old man whose life was given renewed purpose as a result of just a short time with Challenge Wales."
Skipper of Challenge Wales, Captain Andy Hall, said, "Winning this award is a fantastic accolade to our volunteers, supporters and staff. Over the past eight years the charity has grown and is continuing to grow.
"Sail training is a great leveller, putting everyone on the same platform regardless of who you are and your background."
Challenge Wales has an exciting sail training programme planned for 2017 that young people and groups can still be part of, with bursary funding available to support many young people aged 12 - 25 years.