The Spanish cabinet announced Britons could get back on the road from Thursday but had six months to exchange their licences for Spanish ones.
It ended 10 months of diplomatic wrangling between Britain and Spain over the issue, which has angered many expats who have been left stranded.
After Brexit, Britain reached quick deals with 24 other European Union states to allow UK citizens to use their British licences. However, in Spain it became a diplomatic sore point with Madrid pushing for all Britons to exchange their licences for Spanish ones.
Many who failed to exchange their licences by the post-Brexit deadline of December 2020 were unable to drive to work or attend hospital appointments, leaving some complaining of stress.
The ban did not affect tourists or hauliers.
British expats were overjoyed that a deal had finally been reached.
“I am sitting here sobbing like a baby after hearing this news,” said Deb Lee, 63, who lives on a camp site in Catral, near Alicante in south eastern Spain. “This has had a massive impact on my life. What a relief!”
Ms Lee, who is originally from Oxfordshire but moved to Spain despite her lorry driver husband still working in the UK, was taken to hospital suffering from stress last year.
She had been unable to attend hospital appointments or go shopping and felt isolated.
A Spanish government statement said: “The Spanish Council of Ministers has approved this Tuesday a reciprocal agreement between Spain and the United Kingdom on the exchange of driving licences and exchange of information on driving offences.”