How to use order by within the STUFF function and exclude specific values

You can use an ORDER BY and WHERE clause in the subquery. Something like this:

SELECT ID,
       STUFF( (SELECT ';' + t1.CTY
               FROM country_tbl t1
               WHERE t2.ID = t1.ID AND
                     NOT (t1.id = '123456' AND t1.CTY = 'England')
               ORDER BY t1.CTY
               FOR XML PATH('')
              ), 1, 1, ''
            ) AS aggregation
FROM (SELECT DISTINCT id
      FROM master_tbl t2
      WHERE t2.ID IN ('123456','123457')
     ) t2
ORDER BY T2.ID;

I also changed the GROUP BY in the outer query to a SELECT DISTINCT to boost performance.

If I understand you correctly, you want to list the cities in t2 except those that appear in t1 with the same ids, in an ascending order. If that's the case, then you're close, but not quite there.

First, create and populate sample tables (Please save us this step in your future questions):

DECLARE @t1 AS TABLE (
    [ID] int, 
    [Country] varchar(7)
);
    
INSERT INTO @t1 ([ID], [Country]) VALUES
(123456, 'England'),
(123457, 'Canada');


DECLARE @t2 AS TABLE (
    [ID] int, 
    [CTY] varchar(7)
);
    
INSERT INTO @t2 ([ID], [CTY]) VALUES
(123456, 'England'),
(123456, 'Japan'),
(123456, 'France'),
(123456, 'Canada'),
(123457, 'England'),
(123457, 'Japan'),
(123457, 'France');

The query:

SELECT DISTINCT Id,
        STUFF((
            SELECT ';' + t2.CTY
            FROM @t2 As t2
            LEFT JOIN @t1 As t1
                ON t2.Id = t1.Id
                AND t2.CTY = t1.Country
            WHERE t2.ID = t0.ID 
            AND t1.Id IS NULL
            ORDER BY t2.CTY
            FOR XML PATH('')),1,1,'') AS aggregation
FROM @t2 As t0

Results:

Id      aggregation
123456  Canada;France;Japan
123457  England;France;Japan