SQL XML nested query

Do a UNION instead of CASE and use @ to create an attribute.

SELECT
    t1.Code,    
    (SELECT
      (SELECT CodeName as '@Name'
       FROM (
             SELECT t2.CodeName
             FROM Table2 t2
             WHERE t2.Id = t4.Id AND
                   t1.Type = 5
             UNION ALL
             SELECT t3.CodeName
             FROM Table3 t3
             WHERE t3.Id = t4.Id AND
                   t1.Type <> 5
            ) AS T 
       FOR XML PATH('Code'), TYPE)          
     FROM Table4 t4
     WHERE t4.Id = t1.Id
     FOR XML PATH('CodeNames'), TYPE)    
FROM Table1 t1
FOR XML RAW ('Table1Child'), TYPE, ROOT('Table1Root')

It looks like you actually don't need to use Table4.

SELECT
    t1.Code,    
      (SELECT CodeName as '@Name'
       FROM (
             SELECT t2.CodeName
             FROM Table2 t2
             WHERE t2.Id = t1.Id AND
                   t1.Type = 5
             UNION ALL
             SELECT t3.CodeName
             FROM Table3 t3
             WHERE t3.Id = t1.Id AND
                   t1.Type <> 5
            ) AS T 
       FOR XML PATH('Code'), ROOT('CodeNames'), TYPE)          
FROM Table1 t1
FOR XML RAW ('Table1Child'), TYPE, ROOT('Table1Root')