Britain reacted with fury after a European Council document published on Friday described Gibraltar as a colony.

The document, laying out proposals to give British nationals short-stay, visa-free access to the EU's borderless Schengen area after Brexit, contained the description in a footnote.

"It is completely unacceptable to describe Gibraltar in this way," British Prime Minister Theresa May's spokesman told reporters.

"Gibraltar is a full part of the UK family and this will not change due to our exit from the EU," he said.

Gibraltar, home to 33,000 people, was ceded to Britain by Spain in 1713, in perpetuity.

The seven square-kilometre peninsula is an internally self-governing British overseas territory.

Sharing a 1.2-kilometre fenced border with Spain, the implications of Brexit on Gibraltar have formed part of Britain's divorce talks with the European Union.

"Gibraltar is a colony of the British crown," the European Council document said in a starred footnote.

"There is a controversy between Spain and the United Kingdom concerning the sovereignty over Gibraltar, a territory for which a solution has to be reached in light of the relevant resolutions and decisions of the General Assembly of the United Nations."

In a 2002 referendum on whether Britain and Spain should share sovereignty over Gibraltar, 99 per cent of voters said no.

In the 2016 referendum on Britain's EU membership, Gibraltar had the highest pro-Remain vote, at 96 per cent.

The draft divorce deal between London and Brussels - rejected by British MPs - sought to defuse any future tensions over Gibraltar when Britain leaves the EU on March 29.

The deal provides for Spanish-British cooperation on citizens' rights, tobacco and other products, environment, police and customs matters.

It sets the basis for administrative cooperation for achieving full transparency in tax matters, fighting fraud, smuggling and money laundering.