We find ourselves travelling back in time at the Monte Carlo Grand Prix, where one car is doing fabulously and putting its contestants to shame, especially the Vulgarian team. Only at the British Grand Prix fate takes a turn to the worse and the fabulous car is destroyed. Now ended on a scrap yard it is a pitiful sight. Still it's Jeremy and Jemima Potts favourite toy. They are devastated, when Coggins tells them he has to sell "their" car. Meanwhile Truly Scrumpious enters the scene. A beautiul blond woman who has problems with her motorbike. While Scoggins gets her tools she talks to the twins, learning that they live with their dad in a windmill, while their mother is dead. She offers to take them back home on her motorbike, mainly because she wants to talk to Caractacus, because the children are out there, while they should be in school! Scoggins gives the promise not to sell their car for some days, so their dad can buy it for 40 Schillings.
At the windmill Caractacus prepares dinner, when Truly arrives with the children. She is shocked, when Caractacus, does not seem to be angry on the children for playing truant. He insists he is a good father and all this is certainly no concern of hers! After all he is an inventor. Now Truly's curiousity is awakened. Proudly he presents his sweet-making machine, which still has failures (Is it supposed to have all these holes?). He gets more and more annoyed as she even starts giving him hints, what to change here. They end up quarreling and she leaves quite angry. While Caractacus can agree on her being pretty (though pretty he insists they don't need a woman as they have "You Two". Together with Grandpa they eat dinner and the children, who think their dad is rich tell him about the car and the fourty schillings. Caractacus sends them to bed promising to get them the car. He is devastated. Is he a bad father? He tries everything, but he can't give them, what they deserve he feels. While he gets upstairs to take the children to bed Grandpa discovers "He's invented something that works!". Actually the sweets with the holes whistle!
Caractacus takes the children to the Scrumptious Sweet Factory to sell his invention. Being competely confiden he will sell it, his trip almost ends at the entrance as Phillips does not let him through to Lord Scrumptious. Just when everthing seems to be lost Truly enters the scene, looking astonishing lady-like in her beautiful dress. She is Lord Scrumptious daughter and with the row they both had Caractacus sees all hope gone and wants to leave. Truly insists on him showing his invention. She is convinced and helps Caractacus to a meeting with her dad. Lord Scrumptious is not as happy with the new invention and Caractacus has to work hard to convince him. He seems to have manged during a wonderful dance scene (Toot Sweetts), but then everything changes for the worse. Dogs were attracted through the whistles and enter the factory, which is damaged quite a bit.
All hope is lost, especially as in the meantime the spies of Baron Bomburst have found the famous racing car! They have to get it to Vulgaria for the Baron. Back in the windmill Caractacus takes the children to bed once more. They decided to give Caractacus their treasures, or at least what they regard as treasures. Caractacus is heart broken. He decides to have another try after getting the children to bed (Hushabye Mountain). He leaves for the funfair where he wants to make money with his new invention: The Hair-Cut-Machine. Sid, proud of his long hair is pushed to getting his hair cut by Violet, his girl-friend. Everything seems to be great until the machine starts to smoke and Sid's hair is completely gone. Caractacus escapes, is trapped within a folk-dancing group. He joins them to hide. It works, Sid leaves, Caractacus is safe, until a man asks him, if he is Caractacus Potts, because he wants to buy the hair-cut machine. Caractacus agrees for 40 Schillings! The car is his!
For several days Caractacus is not seen. He is hidden in his workshop, hammering away, until some days later Truly visits the Potts family. She wants to take them for a picknick, when Caractacus is ready. He can show off his work: The car!
Caractacus takes the children and Truly for a trip. He is chuffed with his work and wants to enjoy the day with Chitty Chitty Bang Bang, how the car is called now! They have a day out, where they are followed by the spies. When the children fall asleep in the car Truly and Caractacus sit down to talk for the first time intimately. They are short of admitting their love for each other and kissing, when a thunderstorm comes up. The water is rising and they are nearly trapped. Only a miracle can safe their lives now and the miracle does happen. Much to the surprise of Caractacus she produces hovercraft like pillows and they float on the sea. Just when they seem to be safe a Vulgarian ship appears behind them and tries to force them to surrender the car. For nothing they'd give Chitty away! In a tight race they escape.
But while they are still on the run the Baron has got another brilliant idea. If he cannot have the car, he wants to have Caractacus Potts to build him another car that can float! Instead of Caractacus though they kidnap Grandpa by lifting his loo house with a balloon and carrying it to Vulgaria. Caractacus, Truly and the children are too late. They manage to follow the balloon till Beachy Head, a cliff they discover too late. They plunge down the cliff, they seem to be lost, when another miracle happens and Chitty unfolds her wings and lifts them into the air carrying them after Grandpa.
Grandpa arrives in Vulgaria and is welcomed by the Baron and the Vulgarian public. The Baron opens up and tells him he wants him to work his wonders on the Baron's car. Grandpa wants to explain he is not the Caractacus they are searching for, but by doing so he is threatened to be killed. So yes, he is Caractacus. Other inventors are introduced who shall help him constructing the car. Caractacus lifts their spirits after they are already prisoners of the Baron for many, many years. They want to do their best, but they fail. The car is broken and the Baron is shocked. He gives them 24 hours or they will be made into sausages!
Caractacus, Truly and the children have made it into Vulgaria. They have hidden the car and entered the town searching for Grandpa. They are finally discovered by the Toymaker. He takes them to his toyshop immediately as the children are not safe in the streets. They learn that the Baronness hates children and children are forbidden in Vulgaria, they are tracked down by the evil Childcatcher. The childcatcher almost tracked them down, but the Toymaker hides them. The Toymaker offers his help. He takes Caractacus to the Sewer kids while Truly and the children are left in the Toyshop. Masked as the Toymaker the Childcatcher enters the shop and lures Truly away from the children and takes the children as prisoners. Truly only sees him driving away with the children. Devastated she has to follow Caractacus and bring him the news. Shocked he asks the children, if they know anything about their twins. They do, they know where to find them, but they don't dare to help until Caractacus can convince them, if they work together, they can make it!
Back in the castle everyone prepares for the celebrations for Baron Bombursts big birthday bash. The kids, the Toymaker, Caractacus and Truly manage to get inside and overpower the Baron and his people. Truly and Caractacus run for the children. They find the twins, but at the same time they discover they are trapped as the childcatcher is running after them. Caractacus finally manages to confess his love for Truly and asks her to marry him, if they come out of that alive. Yes she will, not that she believes they will escape! Just when all hope is lost, they hear Grandpa sing. The children run for him, but it's once more the childcatcher. Caractacus is hopeless, when suddenly Chitty appears driven by Grandpa. They manage to tie the childcatcher up and send him away.
Vulgaria is freed finally, the Baron and the Baronness have to leave the country. Caractacus, Truly, Grandpa and the children enter the car and leave for their home. The Happy Ending is completed when Caractacus and Truly share a passionate kiss to the cheering of the Vulgarian people!