You've been invited to a fancy dress party but are unsure of what to wear. What do you do? Dust off your tuxedo? Take your cocktail dress to the dry cleaner? Unlock the safe and take out the diamonds? None of the above. When one is invited to a fancy dress party, one is simply being asked to come in costume.
"Fancy dress" is mainly a British term, though those in high society tend to use it as well. It dates back to the Victorian era. Prior to that, masquerade parties were all the rage. Because party-goers were masked and costumed, and therefore anonymous, they had a tendency to act in an inappropriate manner. People were a lot bolder than when dressed in their everyday clothes. To discourage this behavior, masquerade parties fell out of fashion with the social elite. Instead, parties where costumes were required but masks weren't became en vogue. To distinguish them from the scandalous masquerade parties, they became knows as parties of "fancy dress."
Fancy dress parties became quite popular for private as well as public occasions. Queen Victoria was quite well known for her penchant for the fancy dress and used to throw parties of this sort quite often. If there was something to celebrate, there was a good chance it would be celebrated in costume.
Risque or whimsical costumes were considered inappropriate and in bad taste, so party-goers would dress in costumes of historical or literary significance. Shakespeare proved to be a popular theme as were native costumes from other countries, though some of them would be viewed as politically incorrect during this day and age. Other popular costumes portrayed seasons, such as the popular "winter," which meant dressing in a fashionable white dress adorned with elegant accessories such as sparkly "icicles." Peasant dresses were also quite fashionable as they were considered "romantic" and perhaps a bit sexier than costumes that covered cleavage, arms and legs.
Fancy Dress parties indicated a certain moral standard. Men didn't dress as women; women didn't dress as men and body parts weren't exposed. This was, after all, polite society and such behavior was beneath them.
These days, "Fancy Dress" is just a glorified term for a costume party and pretty much anything goes. Most fancy dress parties are held around Halloween, though it's not unheard of to host one of these parties other times during the year as well.