VFE
I'm presuming your IR has only lapsed fairly recently and well within 5 years since last being current. The renewal test is the 'watered down' version as you put it. Fairly relaxed kind of affair compared to the initial IR, and it only needs to be an approved examiner (usually your local club sort of chap) rather than the CAA staff examiners.
You can renew in the sim, either single engine or multi engine, but you will only be able to excercise the priveledges of the IR in the air if you also hold the appropriate class rating. In other words, you can renew a multi IR in the sim without the need of a MEP rating, but you then cannot use the MEIR in the air, unless you subsequently gain the MEP rating. Obviously if you only renew the IR in a single engine sim, you are restricted to use of the IR in SEP aircraft regardless of whether or not you hold the MEP rating. You must renew as a MEIR to use it in ME a/c.
I've done it both ways, and to be honest, although in the air is more costly and less convenient, I much preferred it to the sim. Worth the extra couple of hundred quid, and nice to be able to log some proper multi IFR time as well.