#include <SoftwareSerial.h> //Include SoftwareSerial library

SoftwareSerial myBLUETOOTH(0, 1); //define SoftwareSerial RX first  then TX

#define LED 3 // Define on board LED connected to pin 3
char state;  // Define a variable to save the reads char

void setup() {

  myBLUETOOTH.begin(9600); // Begin SoftwareSerial
  pinMode(LED, OUTPUT); // sets LED pin as OUTPUT pin
}

void loop() {
  if (myBLUETOOTH.available()) { // if SoftwareSerial recived any data

    state = myBLUETOOTH.read();  //Reads the received char and store it at "state"

    if (state == '1') // If you recived Y
      digitalWrite(LED, HIGH); //Turn LED on
    if (state == '2') {     // If you recived n
      digitalWrite(LED, LOW);//Turn LED off
    }

  }
}