"Carbolic" is short for carbolic acid, an old name for phenol. It once was popular as a disinfectant and antiseptic. Places like hospital and workhouses might have been regularly scrubbed down with it, so they would smell of "carbolic." The "odour of sanctity" refers to a medieval belief that saints and holy people literally had a characteristic smell. "He died in the odour of sanctity" is very old-fashioned way of paying a compliment to a dead person; it is a way of saying "he was a very good person" or "a very religious person" or "a very saintly person." To reply to "he died in the odour of sanctity?" "No. Carbolic. A workhouse ward I think" is a sarcastic retort. He didn't die smelling of holiness, he died surrounded by the smell of disinfectant.

I read it a little differently: " He died in ... an odour ... of carbolic". Does that make more sense, given Dan's explanation?