First build XML then cast to NVarchar and add headers, because when processing XML type MSSS treats <xml ..> not as part of data but as a directive specifying following text encoding .

SELECT CAST(N'<?xml version="1.0" encoding="utf-16" standalone="yes"?><!--

SQL Multi Script 1

SQL Multi Script

Version:1.1.0.34-->' AS NVARCHAR(MAX))

+ CAST(

(-- all XML but header

SELECT

'2' as '@version',

(SELECT'List_database' as '@type',

'1' as '@version',

(SELECT

'5' AS '@version',

'database' AS '@type',

'master' AS 'name',

LTRIM(RTRIM(( [Server Name] ))) AS 'server',

'True' AS 'integratedSecurity',

15 AS 'connectionTimeout',

4096 AS 'packetSize',

'False' AS 'encrypted',

'True' AS 'selected',

LTRIM(RTRIM(( [Server Name] ))) AS 'cserver'

FROM -- moke table

(values ('server 1'), ('server 2')) RedGateServerList([Server Name])

FOR XML PATH('value'), TYPE)

FOR XML PATH('ListdatabaseLists'),TYPE)

FOR XML PATH('multiScriptApplication')

) AS NVARCHAR(MAX));