As far as I can tell, the size of the engine makes little difference, only that it be at least euro 4 compliant. This covers petrol cars from 2006 onwards, but presumably the Merc's engine also complies despite being older. Admittedly it does seem counter intuitive, but various classic cars will undoubtably be much dirtier and thirstier than a 5 litre V8 Merc, and they will also be exempt from the charges.

Indeed so. My dirty old 'historic' TR7 is ULEZ exempt, as is my thirsty eventual classic 2005 6litre Audi. But the well engineered W12 is one of the cleanest engines around - the emissions test at 71,013 miles reads... CO (<0.20%) 0.00, HC (<200ppm) 1.

It has nothing to do with engine size or age

Actually it is age related. Euro 4 emissions were introduced in Jan 2005 and from Jan 2006 all new cars registered had to comply.

Cars registered before that date didn't have to, but some did.