In Britain in the early 1900s, recently widowed Mrs Lucy Muir moves to the seaside village of Whitecliff despite the disapproval of her in-laws. She rents a house there named Gull Cottage, although it has a reputation as being haunted by the spirit of a seaman who accidentally died there.

On the first night after moving in with her young daughter, Anna, and her loyal maid, Martha, Lucy is visited by an apparition of the former owner, a roguish but harmless sea captain named Daniel Gregg. He tells Lucy that his death four years ago was not a suicide, but the result of accidentally kicking the valve on a gas-fired room heater in his sleep. Daniel explains that he wanted to turn Gull Cottage into a home for retired seamen and does not appreciate her presence, having personally frightened away previous visitors. However, due to Lucy's headstrong attitude, as well as her appreciation of the house, Daniel reluctantly agrees to allow her to live in Gull Cottage and he promises to make himself visible only to her.

Lucy's poor investment — her only source of income — has dried up, and she considers a move back to London. However, Daniel has warmed up to her and asks her to stay. They decide to write a book, a dictation of his memories from his time at sea, for which she will profit. During the course of writing the book, they fall in love. Both realize it is a hopeless situation, and Daniel tells Lucy that she should find a living man to be with. In London, Lucy goes to meet a publisher and becomes attracted to Miles Fairley, a suave author who writes children's stories under the pen name Uncle Neddy. Daniel's lurid and sensational recollections, titled Blood and Swash, become a bestseller, providing Lucy with royalties which she uses to buy Gull Cottage. Fairley follows her back to Whitecliff and they begin a whirlwind courtship after Fairley claims he fell in love with her at first sight. Though initially jealous of their relationship, Daniel decides to leave, as he considers himself an obstacle to Lucy's chance at happiness. While she is asleep, he places in her mind the suggestion that she alone wrote the book and his presence was merely a dream. He then fades away after declaring his regret that he never had a life with her.

Fairley sends a note cancelling a planned visit to Gull Cottage, saying he will be in London for a few days. Later, Lucy visits London to sign a contract, and obtains Fairley's address in the city from the office clerk to pay a surprise visit. She discovers that Fairley (who is not at home) is already married with two children, and that Fairley has romanced other women in the past. Heartbroken, Lucy returns to Whitecliff to spend the rest of her life as a recluse, with Martha looking after her.

Anna, now at university, returns with a Royal Navy lieutenant she plans to marry. In the course of a conversation with her mother, Anna reveals that she too had seen Daniel, whom she regarded as a childhood friend, and she knew about her mother's relationship with Fairley. Lucy in turn reveals that Fairley is now an overweight alcoholic, abandoned by his wife and children. Through the conversation, Lucy realizes that the ghost she loved was in fact real.