Попробуйте эту функцию simplexml_load_entity_string
<?php
$string = <<<XML
<?xml version="1.0" encoding="UTF-8"?>
<album>
<img src="002.jpg" caption="test<wássup?" />
</album>
XML;
$xml = simplexml_load_entity_string($string);
var_dump($xml);
function simplexml_load_entity_string($string = '')
{
// cover entity except Predefined entities in XML
$string = str_replace([
'"', '&', ''', '<', '>',
], [
'SPECIALquotMARK', 'SPECIALampMARK', 'SPECIALaposMARK', 'SPECIALltMARK', 'SPECIALgtMARK',
], $string);
$string = html_entity_decode($string, ENT_QUOTES, "utf-8");
$string = str_replace([
'SPECIALquotMARK', 'SPECIALampMARK', 'SPECIALaposMARK', 'SPECIALltMARK', 'SPECIALgtMARK',
], [
'"', '&', ''', '<', '>',
], $string);
// load xml
return simplexml_load_string($string);
}