Is Lady Smallwood actually willing to just let Sherlock go? But Mycroft doesn't agree because Sherlock murdered someone therefore must be punished whatsoever?
She merely said
"Hardly merciful Mr. Holmes."
I don't think she was suggesting to just let him go. Quite the opposite really. I think she wanted him to be detained in some sort of prison, she just didn't think he needed to die.
Earlier in the episode Mycroft told Sherlock about an assignment that would end with him dead in 6 months. At the plane, as they are saying their goodbyes, John asks Sherlock how long the assignment will take.
"Six months, my brother estimates. He's never wrong."
He was being sent, at Mycroft's suggestion, to his death until
Moriarty shows up at the end and Sherlock is called back to duty.