Using blind transfer in IVR app

Can the system do blind transfers in that if a caller presses *1 to be transferred that once they are transferred to the external party and the external party answers, our phone line is released. Would this feature require an external PBX system and if so what type?

Yes, the system can do blind transfer. However, it depends on the phone system you are using.

For most VOIP services, there is no native call transfer (blind transfer). This reason most likely is related to billing – once a call is transferred, the two parties that stays active are not the customer of the VOIP service. The actually paying customer (you) has disconnected the call already. So if the VOIP service provides no native call transfer, VOIP software will do a call transfer by joining the two parties in a conference call, which means your original incoming line is not freed, and you also need another line/channel for the second leg of the call to the transferred party.

By using an external PBX system is not going to help in this situation since somewhere the two parties must be connected. If your phone service does not provide native/blind call transfer, then the PBX system must provide the conference call, which will not free the line/channel of the original call.