The territory is administered by a commissioner of the Foreign and Commonwealth Office in London. Although there is no permanent civilian population on the islands, generally about 4,000 U.S. and British military and contract civilian personnel are stationed there. The territory has a total land area of 23 square miles (60 square km).

Lying at the centre of the Indian Ocean region and out of the path of cyclonic storms, the archipelago is strategically located. The islands, uninhabited when they were discovered by Portuguese explorers in the 16th century, were situated on international trade routes and became the focus of competing claims by European powers. In the late 18th century France took possession of the Chagos Archipelago and Seychelles as dependencies of Mauritius, and coconut plantations were established to produce copra. Slaves were imported from Africa to work the plantations. Ownership passed to Britain in 1814 under the Treaty of Paris (Paris, Treaties of).

During the Cold War an agreement between the governments of Britain and the United States led to the creation of the British Indian Ocean Territory, where defense and communications facilities were established to counterbalance the Soviet military presence in the region. A major British-U.S. military facility was built on Diego Garcia in 1971, and the plantations there were closed. Between 1967 and 1973, Britain removed the Ilois, or Chagossians—indigenous inhabitants of the Chagos Archipelago, descended from African slaves and Indian plantation workers—who were given the choice of resettlement in either Seychelles or Mauritius; the majority chose the latter. A small number of Ilois went to the United Kingdom. Expansion of the military facilities during the late 1970s and '80s was opposed by neighbouring states, who viewed the base as compromising the nonmilitarized status of the Indian Ocean region. Numerous air strikes were launched from Diego Garcia during the Persian Gulf War (1990–91), the U.S.-led attacks on Afghanistan (2001), and the initial phase (2003) of the Iraq War.

In 2000 the British High Court found that the removal of the Ilois had been illegal. The court granted them the immediate right to return to any of the islands except Diego Garcia, although the Ilois maintained that the right to return to that atoll would have to be part of any resolution. At the time of the ruling, the Ilois numbered some 5,000. British and U.S. officials opposed the plan for resettlement, but in 2006 the High Court upheld its decision. In 2007 the British government lost its case before the Court of Appeal but announced its intention to challenge that decision in the House of Lords. The following year a majority of the panel of five Law Lords ruled against the islanders, although the government expressed regret for the original resettlement.