First and foremost I think true commitment is really necessary for any sexual relationship to be meaningful. Therefore i respond with the assumption that you're fully committed to one-another, not just sexually, but emotionally as well.
I'd venture to say it all depends on your style of communication as a couple. However you tell him, I think it will help that you show him you understand how important his fantasy is to him. If you're not exactly sure how important it is to him to live out his fantasy, you might ask him to rate it on a scale from 1-10, 1 being not important at all, 10 being it's so important he'd break up with you if you didn't eventually meet his expectations. As you ask let it be a way of showing him that you care and aren't simply saying "no" because you don't want to. When he knows you care, then tell him how uncomfortable it makes you in similar terms (whether on the scale of 1-10 or some other way, -- i.e. it's illegal, demeaning, unappealing to you). You might consider making a compromise. Find out something else he likes and try that. Suggest something else you
are comfortable with while validating his feelings. Validation is the key to being gentle. You can validate his feelings while being assertive, without sympathizing or agreeing to do anything that makes you uncomfortable. If he loves you he'll respect you and be grateful that you understand his more taboo fantasies, even if you never indulge them
This page has more information about validation if you like. I recommend reading it.
Above all, make love-making fun for both of you. If that's impossible then there's a bigger problem.