diff --git a/src/vs/platform/terminal/common/terminal.ts b/src/vs/platform/terminal/common/terminal.ts
index 8aadbcd03762c..67acbd29a3bfe 100644
--- a/src/vs/platform/terminal/common/terminal.ts
+++ b/src/vs/platform/terminal/common/terminal.ts
@@ -503,6 +503,11 @@ export interface IShellLaunchConfig {
 	 * Opt-out of the default terminal persistence on restart and reload
 	 */
 	disablePersistence?: boolean;
+
+	/**
+	 * This is a split terminal that inherited its parent's cwd
+	 */
+	splitInheritedCwd?: boolean;
 }
 
 export interface ICreateContributedTerminalProfileOptions {
diff --git a/src/vs/workbench/contrib/terminal/browser/terminalInstance.ts b/src/vs/workbench/contrib/terminal/browser/terminalInstance.ts
index d8b6b5fd7301c..114970c25e6d0 100644
--- a/src/vs/workbench/contrib/terminal/browser/terminalInstance.ts
+++ b/src/vs/workbench/contrib/terminal/browser/terminalInstance.ts
@@ -1232,7 +1232,7 @@ export class TerminalInstance extends Disposable implements ITerminalInstance {
 			// Set the initial name based on the _resolved_ shell launch config, this will also
 			// ensure the resolved icon gets shown
 			if (!this._labelComputer) {
-				this._labelComputer = this._register(new TerminalLabelComputer(this._configHelper, this, this._workspaceContextService));
+				this._labelComputer = this._register(new TerminalLabelComputer(this._configHelper, this, this._workspaceContextService, this.shellLaunchConfig.splitInheritedCwd));
 				this._labelComputer.onDidChangeLabel(e => {
 					this._title = e.title;
 					this._description = e.description;
@@ -2257,7 +2257,8 @@ export class TerminalLabelComputer extends Disposable {
 	constructor(
 		private readonly _configHelper: TerminalConfigHelper,
 		private readonly _instance: Pick<ITerminalInstance, 'shellLaunchConfig' | 'cwd' | 'fixedCols' | 'fixedRows' | 'initialCwd' | 'processName' | 'sequence' | 'userHome' | 'workspaceFolder' | 'staticTitle' | 'capabilities' | 'title' | 'description'>,
-		@IWorkspaceContextService private readonly _workspaceContextService: IWorkspaceContextService
+		@IWorkspaceContextService private readonly _workspaceContextService: IWorkspaceContextService,
+		private readonly _splitInheritedCwd?: boolean
 	) {
 		super();
 	}
@@ -2298,7 +2299,7 @@ export class TerminalLabelComputer extends Disposable {
 		const detection = this._instance.capabilities.has(TerminalCapability.CwdDetection) || this._instance.capabilities.has(TerminalCapability.NaiveCwdDetection);
 		const zeroRootWorkspace = this._workspaceContextService.getWorkspace().folders.length === 0 && this.pathsEqual(templateProperties.cwd, this._instance.userHome || this._configHelper.config.cwd);
 		const singleRootWorkspace = this._workspaceContextService.getWorkspace().folders.length === 1 && this.pathsEqual(templateProperties.cwd, this._configHelper.config.cwd || this._workspaceContextService.getWorkspace().folders[0]?.uri.fsPath);
-		if (this._instance.cwd !== this._instance.initialCwd) {
+		if ((this._instance.cwd !== this._instance.initialCwd) || this._splitInheritedCwd) {
 			templateProperties.cwdFolder = (!templateProperties.cwd || !detection || zeroRootWorkspace || singleRootWorkspace) ? '' : path.basename(templateProperties.cwd);
 		}
 
diff --git a/src/vs/workbench/contrib/terminal/browser/terminalService.ts b/src/vs/workbench/contrib/terminal/browser/terminalService.ts
index 9a2186bec36ab..9496ea2e2d6fa 100644
--- a/src/vs/workbench/contrib/terminal/browser/terminalService.ts
+++ b/src/vs/workbench/contrib/terminal/browser/terminalService.ts
@@ -929,7 +929,7 @@ export class TerminalService implements ITerminalService {
 
 		const splitActiveTerminal = typeof options?.location === 'object' && 'splitActiveTerminal' in options.location ? options.location.splitActiveTerminal : typeof options?.location === 'object' ? 'parentTerminal' in options.location : false;
 
-		this._resolveCwd(shellLaunchConfig, splitActiveTerminal, options);
+		shellLaunchConfig.splitInheritedCwd = await this._resolveCwd(shellLaunchConfig, splitActiveTerminal, options);
 
 		// Launch the contributed profile
 		if (contributedProfile) {
@@ -975,7 +975,7 @@ export class TerminalService implements ITerminalService {
 		return this._createTerminal(shellLaunchConfig, location, options);
 	}
 
-	private async _resolveCwd(shellLaunchConfig: IShellLaunchConfig, splitActiveTerminal: boolean, options?: ICreateTerminalOptions): Promise<void> {
+	private async _resolveCwd(shellLaunchConfig: IShellLaunchConfig, splitActiveTerminal: boolean, options?: ICreateTerminalOptions): Promise<boolean | undefined> {
 		let cwd = shellLaunchConfig.cwd;
 		if (!cwd) {
 			if (options?.cwd) {
@@ -989,8 +989,10 @@ export class TerminalService implements ITerminalService {
 					throw new Error('Cannot split without an active instance');
 				}
 				shellLaunchConfig.cwd = await getCwdForSplit(this.configHelper, parent, this._workspaceContextService.getWorkspace().folders, this._commandService);
+				return !!shellLaunchConfig.cwd;
 			}
 		}
+		return undefined;
 	}
 
 	private _splitTerminal(shellLaunchConfig: IShellLaunchConfig, location: TerminalLocation, parent: ITerminalInstance): ITerminalInstance {