diff --git a/src/vs/workbench/api/node/extHostTerminalService.ts b/src/vs/workbench/api/node/extHostTerminalService.ts
index a1de46cfdf5..2aad0a4c38f 100644
--- a/src/vs/workbench/api/node/extHostTerminalService.ts
+++ b/src/vs/workbench/api/node/extHostTerminalService.ts
@@ -503,7 +503,7 @@ export class ExtHostTerminalService implements ExtHostTerminalServiceShape {
 			terminalConfig.get<boolean>('setLocaleVariables', false),
 			// Always inherit the environment as we need to be running in a login shell, this may
 			// change when macOS servers are supported
-			true
+			process.env as platform.IProcessEnvironment
 		);
 
 		// Fork the process and listen for messages
diff --git a/src/vs/workbench/contrib/terminal/browser/terminalProcessManager.ts b/src/vs/workbench/contrib/terminal/browser/terminalProcessManager.ts
index 51ed69c3793..8a3b9b1e9e1 100644
--- a/src/vs/workbench/contrib/terminal/browser/terminalProcessManager.ts
+++ b/src/vs/workbench/contrib/terminal/browser/terminalProcessManager.ts
@@ -171,8 +171,8 @@ export class TerminalProcessManager implements ITerminalProcessManager {
 		const lastActiveWorkspace = activeWorkspaceRootUri ? this._workspaceContextService.getWorkspaceFolder(activeWorkspaceRootUri) : null;
 		const envFromConfigValue = this._workspaceConfigurationService.inspect<ITerminalEnvironment | undefined>(`terminal.integrated.env.${platformKey}`);
 		const isWorkspaceShellAllowed = this._configHelper.checkWorkspaceShellPermissions();
-		this._terminalInstanceService.getMainProcessParentEnv();
-		const env = terminalEnvironment.createTerminalEnvironment(shellLaunchConfig, lastActiveWorkspace, envFromConfigValue, this._configurationResolverService, isWorkspaceShellAllowed, this._productService.version, this._configHelper.config.setLocaleVariables, this._configHelper.config.inheritEnv);
+		const baseEnv = this._configHelper.config.inheritEnv ? process.env as platform.IProcessEnvironment : this._terminalInstanceService.getMainProcessParentEnv();
+		const env = terminalEnvironment.createTerminalEnvironment(shellLaunchConfig, lastActiveWorkspace, envFromConfigValue, this._configurationResolverService, isWorkspaceShellAllowed, this._productService.version, this._configHelper.config.setLocaleVariables, baseEnv);
 
 		const useConpty = this._configHelper.config.windowsEnableConpty;
 		return this._terminalInstanceService.createTerminalProcess(shellLaunchConfig, initialCwd, cols, rows, env, useConpty);
diff --git a/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts b/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
index 7d260cd9418..0e49495815a 100644
--- a/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
+++ b/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
@@ -199,7 +199,7 @@ export function createTerminalEnvironment(
 	isWorkspaceShellAllowed: boolean,
 	version: string | undefined,
 	setLocaleVariables: boolean,
-	inheritEnv: boolean
+	baseEnv: platform.IProcessEnvironment
 ): platform.IProcessEnvironment {
 	// Create a terminal environment based on settings, launch config and permissions
 	let env: platform.IProcessEnvironment = {};
@@ -208,7 +208,7 @@ export function createTerminalEnvironment(
 		mergeNonNullKeys(env, shellLaunchConfig.env);
 	} else {
 		// Merge process env with the env from config and from shellLaunchConfig
-		mergeNonNullKeys(env, inheritEnv ? process.env : {});
+		mergeNonNullKeys(env, baseEnv);
 
 		// const platformKey = platform.isWindows ? 'windows' : (platform.isMacintosh ? 'osx' : 'linux');
 		// const envFromConfigValue = this._workspaceConfigurationService.inspect<ITerminalEnvironment | undefined>(`terminal.integrated.env.${platformKey}`);