Hazards of Upgrading SQL Server Express 2008 to R2
You're unlikely to run into any issues with this but that said, it's rarely caution that gets a DBA fired. 

I'd probably go with installing a named instance, side-by-side with the existing instance. As you've got a test bed server up already I'd also suggest testing the application with 2012 Express. Why upgrade to an already out-dated version?