57 years after the events of the first film, Charlie B. Barkin Charlie Sheen welcomes his friend Itchy Itchiford Dom DeLuise to Heaven, but he admits that the afterlife has left him feeling jaded and restless. Their old foe Carface Caruthers Ernest Borgnine steals Gabriel's Horn but loses it somewhere over San Francisco in an attempt to escape with it. When head angel Annabelle Bebe Neuwirth announces the horn's theft, Charlie submits his candidacy to retrieve it, reminding Annabelle of his familiarity with street life. Annabelle sends Charlie and Itchy to Earth to retrieve it, and grants them one miracle to use.
Upon arriving in San Francisco, Charlie and Itchy discover they are ghosts and cannot interact with the physical world. In a tavern, Charlie is drawn to Sasha La Fleur Sheena Easton, an Irish Setter whose charm captivates him, while Carface appears in corporeal form granted by Red George Hearn, the elderly dog fortune teller who is secretly a large demonic cat. They also meet an eight-year-old boy named David Adam Wylie who has run away from home to pursue a life as a street magician. Charlie uses his miracle to grant Sasha the ability to converse with David, and David comes to believe that Charlie is his guardian angel.
Charlie spots the horn being taken into a San Francisco police station and manages to recover it, but he hides the horn in a lobster trap instead of returning it right away. After David’s street performance ends in failure, he reveals that he fears his father and stepmother, who are expecting a new baby, will care less for him once the baby is born. Charlie tries to reassure him and promises to return him home, though privately he doubts he can keep that promise. The collars that gave Charlie and Itchy their earthly powers vanish, and they once more become ghosts.
Carface kidnaps David and orders Charlie to bring Gabriel's horn to Alcatraz Island and give it to Red in exchange for David’s life. Determined to honor his word, Charlie complies, and Red uses the horn to seize Heaven’s angels and trap them in Alcatraz while opening a portal that would permanently join the human world to Hell. After a fierce struggle, Charlie regains the horn and uses it to free the angels, sending Red and Carface—Carface having sold his soul for the collar—back to Hell. Charlie and Itchy are spirited away to Heaven, and Charlie returns the horn to Annabelle in exchange for a new life Bebe Neuwirth.
Back on Earth, Charlie bids farewell to Itchy, who chooses to stay in Heaven, while Charlie reunites with Sasha and David. David returns home and reconciles with his father and stepmother, and the two families adjust to life together. Charlie and Sasha, now companions in the truest sense, are eventually adopted by David’s family as pets, bringing a new sense of belonging to the ones who stayed behind and the ones who found a second chance on the earthly plane.
