In the letter in a pleasant way, you want to let the person down gently in a professional, courteous, non-insulting, and not in a hypercritical way.
Then you want to end on a positive note, not a phony note, you want to be honest but at the same time, and keep it friendly. Keep it as upbeat as possible.
Starting with the buffer, you want to kind of soften the blow by giving your applicant recipient, perhaps a compliment, if not
A compliment, a positive statement to the effect of your background or your work.
History and academic background are certainly very impressive. That’s a good buffer and in terms of giving the facts or which would be the bad news you might say something to the effect unfortunately at this time there are no positions available at our company that match or suit your background
Then you want to end on a positive note or something a little bit complimentary, A well-deserved compliment, or a positive upbeat thought, and courteous way to end your letter.
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