The daughter of a doctor, Sheila was born in St Leonards-on-Sea, near Hastings, in Sussex, and lived most of her life in that county, apart from a period in London in her youth. She was a distant relative of writer M M Kaye (The Far Pavilions).

In 1924 she married Theodore Penrose Fry, an Anglican clergyman, and in 1925 wrote a book on Anglo-Catholicism. By 1929 she and her husband had converted to Roman Catholicism. Penrose Fry therefore had to give up his Anglican curacy, and they moved to Northiam in Sussex, where they lived in a large converted oast house. Soon afterwards, having noted their own and some of their neighbours' need for a nearby Catholic church, they bought land on which they established a Catholic chapel, St Teresa of Lisieux, at Northiam, which still enjoys a large congregation. Sheila is buried in the churchyard there. Their house, Little Doucegrove, was later owned by novelist Rumer Godden, another female Catholic convert novelist.

Kaye-Smith's fiction was noted for being rooted in rural concerns: the nineteenth century agricultural depression, farming, legacies, land rents, strikes, the changing position of women, the effects of industrialisation on the countryside and provincial life. Admirers of her work included her close friend G. B. Stern (with whom she collaborated on two books about Jane Austen), Thomas Hardy, and Noel Coward.

Kaye-Smith's novels straddle more than one genre of fiction. Her earliest novels partly fit into the 'earthy' rural category, together with that of Mary E Mann, Mary Webb, D. H. Lawrence, and Thomas Hardy, a genre which inspired Stella Gibbons's parody "Cold Comfort Farm". Kaye-Smith's descriptions of the Sussex countryside, coast and marsh are still regarded as some of the finest. Several of her heroines become single parents and most face various gender-related trials, reflecting her early feminism as well as influences such as George Moore and Thomas Hardy. Kaye-Smith also produced many short stories, and journalism published in national journals, magazines and newspapers.

Arguably Kaye-Smith's most famous novel, Joanna Godden was based in Romney Marsh and filmed in 1947 as The Loves of Joanna Godden starring Googie Withers and with a score by Ralph Vaughan Williams. The screenplay by H. E. Bates has a very different conclusion to the story.

Her later books increasingly reflected her own religious preoccupations, featuring characters tussling with spiritual crises and conversions within subtle discussions of the differences between Anglicanism, Anglo-Catholicism and Roman Catholicism. Nevertheless her plots reflect the pre- and post- WW2 preoccupations of women's 'middle-brow' fiction of the time, including national anxieties about social class, divorce, and women's 'role', within a mainly rural but rapidly modernising milieu. They therefore share similarities with contemporary writers such as Barbara Pym, Marghanhita Laski and H E Bates. Her descriptions of farming practices and economics, and village vernacular are particularly detailed and accurate for this genre.

Joanna Godden and Susan Spray were reissued in the 1980s by feminist publishing house Virago. Her books are out of print, but easily available on the used book market.

The Sheila Kaye-Smith literary society is based in St Leonards-on-Sea, meets regularly, and has published a chronology of her life and works, as well producing an annual journal, The Gleam. There are extensive archives relating to Sheila Kaye-Smith in West Sussex County Library in Chichester.