(2-part post):
Benefits are a nightmare to work out. You'd be well advised to contact your local Citizens' Advice Bureau for expert guidance. However, the following might help:
General information about Incapacity Benefit is here:
http://www.direct.gov.uk/en/DisabledPeople/Fin ancialSupport/DG_10016082
You can find out about working, while on Incapacity Benefit, here:
http://www.direct.gov.uk/en/DisabledPeople/Fin ancialSupport/DG_10020667
(Your friend can probably earn up to �88.50 per week without affecting his Incapacity Benefit).
If you rent out a specific part of your house or flat to your friend (i.e. as you would to a lodger), this would be classed as 'sub-letting', which breaches nearly all tenancy agreements. (i.e. your landlord could seek to have you evicted). However, a simple flat- (or house-) sharing arrangement doesn't necessarily breach your tenancy agreement; you'd need to read the small print to find out if you're allowed to have another person living with you.