I would contact the customer and let them know that the package was returned. Then give them the option of either resending it at their expense or issuing a refund. You should not keep the money if the customer did not get the object. If you do issue a refund, make sure it is only for the item price and not the shipping. It is not your fault that the customer never claimed the package. It is possible that it was unclaimed due to the additional customs VAT fees that British customers are now required to pay. Many of them are upset when they discover that those fees are due before they can claim their packages and refuse to pay them. By the way, those fees are the responsibility of the customer, not you.
You should try to contact the customer both by Etsy convos and their direct email address. I would give them a definite date they need to respond by so that you can relist the item it they don't want it or you never hear from them again. That way you will feel that you at least tried. If you never hear back from them, then relist the item and don't worry about it. You did what you could and if they eventually do contact you, you can then figure a way to refund their money.
As for refunding their money, you will need to figure out how to do that, depending on how they paid. Probably the easiest way would be to send them the funds through PayPal, but not as a refund. It is too late for an actual refund. If you call PayPal, they can tell you the easiest way to do it.
If you do resend the item, make sure you have their correct address and that they are aware of and willing to pay their VAT fees.
This is one of those rare yet frustrating things about running a business. Just make sure you are professional in whatever way you handle the situation, and you will be fine and also feel good about the way it was handled.
Good luck.
