What happens if I decline a Steam gift?

My friend has just sent me a gift for Christmas on Steam, but I already have a copy of it.
I want to know what will happen if I decline the gift. Will my friend be able to get a refund on it, or will he just have the game himself?

A declined gift will be returned to the owner's gift inventory, from where it can be gifted again.

Valve generally does not grant refunds in this case, as Steam already tells the user if the gift target already owns the game.

Generally, if you decline a gift, it will be deleted, and the sender will automatically receive a refund.

The sender will receive a notification like this:

However, if the gift was sent from the sender's gift inventory, it will not be refunded, and instead just remain there. It can be re-gifted or redeemed at will.

Since May 4th 2017, it is no longer possible to add games to your inventory, but pre-existing gift copies can still be sent this way.

If you decline the game (or any gift) it will just return back to the senders inventory. From there, they can send/trade it with someone else.