Spain and the UK were at peace at the time, but intelligence learned of a secret treaty by which Spain paid Napoleon tribute until it declared war. Admiralty believed Spain would declare war as soon as this treasure fleet arrived.
So, a squadron was sent to intercept the four frigate fleet. The action was over quickly - an action between four Spanish and British frigates was hardly a fair fight in those days. But a lucky shot landed in the Mercedes magazine and the ship exploded.
The epilogue is interesting too. An Admiralty court denied the crews their prize money because Britain was not technically at war with Spain (wink, wink). They did later make a gratis payment, however.
And this was the last Spanish "treasure fleet" from the New World.
http://en.wikipedia.org/wiki/Action_of_5_October_1804
That French Revolutionary era was an unfortunate time for Spain, as well as the other monarchies on the European continent. At first, Spain and Britain actually forged an alliance against Revolutionary France but, with the realities of French land power being what they were, each European Continental power had to yield to French wishes and Spain became a reluctant French ally. Similarly, the British had to attack the Danish Fleet at Copenhagen to prevent it from falling into French hands.
Among the officer class at least, relations between the British and the Spaniards were extremely cordial which was not the case, with either the British or Spaniards, in regards to their relations with the French. The correspondence between the Spanish commander of Tenerife, Antonio Gutiérrez de Otero, and Horatio Nelson after Nelson's failed attack and wounding consisted of Gutierrez offering Nelson a surgeon, Nelson sending Gutierrez a gift of British beer and cheese and Gutierrez sending back a barrel of Malmsey wine as well as flowery compliments back and forth.
A couple of days after that Battle of Cape St. Vincent, that ancestor (a great uncle, actually) was released, along with the other Spanish wounded, at Lagos, Portugal. A few years later, after the French invasion of Spain, he was in rebellion against the "Intruder King", Joseph Bonaparte, and commanding a Spanish coastal fort in northern Spain, guarding a port used by his once again allies, the British, during the Peninsular War.
His brother (my 3x-great-grandfather) ended up ambushing French troops as they passed through the family estates near that port while the brother-in-law (the sister's husband), an "Afrancesado" ("Frenchified") ended up serving Joseph Napoleon as the Admiral of the now captive Spanish fleet at El Ferrol. The Spanish naval history encyclopedia, although sneeringly noting "his extremely unfortunate judgment in serving the Intruder King" does admit that the brother-in-law "did render his Fatherland one final service" by finding excuses and delays for the Spanish fleet not to sail for Brest, France thereby keeping the fleet out of French hands when the French evacuated Spain after Wellington's victories. Regardless, after the war, the brother-in-law fled with the French to exile in France and was never allowed to return to Spain although his service record has several pleading letters to the Spanish King begging for a pardon and permission to return home. I am still trying to determine if that great-aunt followed her husband to exile in France or stayed in Spain with her brothers. Interestingly, the brother-in-law's service record documents that he was the captain of a Spanish frigate during the Battle of Pensacola against the British during the American Revolution.
It was a very unfortunate time for Spain and the rest of Continental Europe.
Then again, until the Pax Americana, Europe always had very unfortunate times.