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I would suggest being truthful with your direct report, explaining that you do not feel they are qualified yet, and then offer resources to help them get there.
Be honest, both with your team member and yourself. If you can show them objectively why they are not qualified, and can explain how they could, in time perhaps, become qualified, that's one thing. But if you're just going on instinct that they're not qualified, accept that you may be wrong. Give them a recommendation and let them sink or swim.
Your recommendation can focus on attesting to their strengths and past success on your team. You are not putting your name on promising success in a future endeavor.
Coaching about whether or not they're qualified for the role is a separate conversation. Schedule a separate conversation about this so it doesn't appear to conflict with the recommendation.
I agree with being transparent, you are not doing anyone a favor by being polite. Part of coaching and mentoring is delivering honest feedback and helping your team develop skills. If you feel they lack these skills, then help understand where they can grow. Thank them for trusting you and bringing this interest to your attention (since that is provably protocol) and that you are happy to share their strengths in their current role — if these are transferable, then great!
Honestly just recommend them