Land degradation and extensive soil erosion are serious environmental concerns in Iceland. Natural processes associated with a harsh climate and frequent volcanic activity have shaped Icelandic landscapes. However, following human settlement and the introduction of livestock in the ninth century, the extent of soil erosion rapidly escalated. Despite increased restoration and afforestation efforts and a considerable reduction in sheep numbers during the late 20th century, many Icelandic rangelands remain in poor condition. A deeper understanding of the ecology of these dynamic landscapes is needed, and state‐and‐transition models (STMs) can provide a useful conceptual framework. STMs have been developed for ecosystems worldwide to guide research, monitoring, and management but have been used at relatively small spatial scales and have not been extensively applied to high‐latitude rangelands. Integrating the best available knowledge, we develop STMs for rangelands in Iceland, where sheep grazing is often regarded as a main driver of degradation. We use STMs at a countrywide scale for 3 time periods with different historical human influence, from presettlement to present days. We also apply our general STM to a case‐study in the central highlands of Iceland to illustrate the potential application of these models at scales relevant to management. Our STMs identify the set of possible states, transitions and thresholds in these ecosystems, and their changes over time and suggest increasing complexity in recent times. This approach can help identify important knowledge gaps and inform management efforts and monitoring programmes, by identifying realistic and achievable conservation and restoration goals.