diff --git a/flake.nix b/flake.nix
index cd0a1d5..51d1002 100644
--- a/flake.nix
+++ b/flake.nix
@@ -105,13 +105,6 @@
           ${pkgs.alejandra}/bin/alejandra --check ${./.}
           touch $out
         '';
-
-        # NixOS VM test for pi-agent module (x86_64-linux only)
-        pi-agent-vm-test =
-          if system == "x86_64-linux"
-          then
-            pkgs.nixosTest (import ./tests/nixos/pi-agent-test.nix {inherit pkgs;})
-          else {};
       });
 
     # Templates for creating new packages/modules
diff --git a/modules/nixos/pi-agent-runner.nix b/modules/nixos/pi-agent-runner.nix
index 438ba61..d8ccec4 100644
--- a/modules/nixos/pi-agent-runner.nix
+++ b/modules/nixos/pi-agent-runner.nix
@@ -1,4 +1,9 @@
-{cfg, pkgs, lib, ...}:
+{
+  cfg,
+  pkgs,
+  lib,
+  ...
+}:
 with lib; let
   managedSettingsFile = pkgs.writeText "pi-agent-managed-settings.json" (builtins.toJSON cfg.settings);
 
@@ -37,7 +42,7 @@ with lib; let
     cfg.hostUsers
   );
 in
-pkgs.writeShellScriptBin cfg.wrapper.runnerName ''
+  pkgs.writeShellScriptBin cfg.wrapper.runnerName ''
         set -euo pipefail
 
         if [ "$(id -u)" -ne 0 ]; then
@@ -348,6 +353,13 @@ pkgs.writeShellScriptBin cfg.wrapper.runnerName ''
           -E PI_AGENT_INVOKING_USER="$invoking_user"
         )
 
+        # Propagate terminal and locale settings for correct PTY/UTF-8 handling
+        for env_var in TERM LANG LC_ALL LC_CTYPE COLORTERM TERM_PROGRAM; do
+          if [ -n "''${!env_var:-}" ]; then
+            cmd+=( -E "$env_var=''${!env_var}" )
+          fi
+        done
+
         ${optionalString (cfg.projectGroup != null) ''
       cmd+=( -p SupplementaryGroups=${cfg.projectGroup} )
     ''}
@@ -373,4 +385,4 @@ pkgs.writeShellScriptBin cfg.wrapper.runnerName ''
         cmd+=( "$@" )
 
         exec "''${cmd[@]}"
-''
+  ''
diff --git a/modules/nixos/pi-agent-wrapper.nix b/modules/nixos/pi-agent-wrapper.nix
index 61dcfc6..e276432 100644
--- a/modules/nixos/pi-agent-wrapper.nix
+++ b/modules/nixos/pi-agent-wrapper.nix
@@ -1,6 +1,12 @@
-{cfg, pkgs, lib, runner, ...}:
+{
+  cfg,
+  pkgs,
+  lib,
+  runner,
+  ...
+}:
 with lib;
-pkgs.writeShellScriptBin cfg.wrapper.commandName ''
+  pkgs.writeShellScriptBin cfg.wrapper.commandName ''
     set -euo pipefail
 
     user_name="$(id -un)"
@@ -88,5 +94,9 @@ pkgs.writeShellScriptBin cfg.wrapper.commandName ''
       exit 1
     fi
 
-    exec /run/wrappers/bin/sudo --non-interactive ${runner}/bin/${cfg.wrapper.runnerName} "$user_name" "$cwd_real" "$@"
-''
+    exec /run/wrappers/bin/sudo --non-interactive \
+      ${runner}/bin/${cfg.wrapper.runnerName} \
+      "$user_name" "$cwd_real" \
+      "TERM=$TERM" "LANG=$LANG" "LC_ALL=''${LC_ALL:-}" "LC_CTYPE=''${LC_CTYPE:-}" "COLORTERM=''${COLORTERM:-}" \
+      "$@"
+  ''
diff --git a/modules/nixos/pi-agent.nix b/modules/nixos/pi-agent.nix
index 4c01233..e153609 100644
--- a/modules/nixos/pi-agent.nix
+++ b/modules/nixos/pi-agent.nix
@@ -264,6 +264,16 @@ in {
       "d ${cfg.stateDir}/.npm-global/lib 0750 ${cfg.user} ${cfg.group} - -"
     ];
 
+    # Ensure correct ownership of stateDir after user creation.
+    # createHome = true causes useradd to create the directory as root:root
+    # before systemd-tmpfiles can set the intended owner.
+    system.activationScripts.pi-agent-chown = {
+      deps = ["users"];
+      text = ''
+        chown ${cfg.user}:${cfg.group} ${cfg.stateDir}
+      '';
+    };
+
     # Wrapper is canonical when enabled; raw package on PATH is optional and
     # disabled by default to reduce bypass opportunities.
     environment.systemPackages =
diff --git a/tests/nixos/pi-agent-test.nix b/tests/nixos/pi-agent-test.nix
deleted file mode 100644
index 4d56a08..0000000
--- a/tests/nixos/pi-agent-test.nix
+++ /dev/null
@@ -1,112 +0,0 @@
-# NixOS VM test for the pi-agent module
-#
-# Verifies that:
-# - The module can be evaluated without errors
-# - The pi-agent system user and group are created
-# - The wrapper script is available on PATH
-# - The state directory structure is created
-# - Sudo rules are configured for authorized users
-#
-# Run with: nix build .#checks.x86_64-linux.pi-agent-vm-test
-{
-  pkgs,
-  ...
-}:
-{
-  name = "pi-agent";
-
-  meta = {
-    maintainers = ["m3tam3re"];
-    timeout = 120;
-  };
-
-  nodes.machine = {
-    config,
-    lib,
-    ...
-  }: {
-    imports = [
-      # Import the pi-agent module from this flake
-      (pkgs.path + "/nixos/modules/testing/test-instrumentation.nix")
-    ];
-
-    # Provide a mock pi-agent package
-    m3ta.pi-agent = {
-      enable = true;
-      package = pkgs.writeScriptBin "pi-agent" ''
-        #!/bin/sh
-        echo "pi-agent mock v1.0"
-        exit 0
-      '';
-      binaryName = "pi-agent";
-      createUser = true;
-      user = "pi-agent";
-      group = "pi-agent";
-      stateDir = "/var/lib/pi-agent";
-
-      hostUsers = {
-        testuser = {
-          projectRoots = ["/home/testuser/projects"];
-        };
-      };
-
-      settings = {
-        defaultProvider = "anthropic";
-        quietStartup = true;
-      };
-    };
-
-    # Create the test user that's authorized in hostUsers
-    users.users.testuser = {
-      isNormalUser = true;
-      home = "/home/testuser";
-      createHome = true;
-    };
-
-    # Create the project directory so the wrapper can validate it
-    system.activationScripts.createProjectDir = ''
-      mkdir -p /home/testuser/projects
-      chown testuser:users /home/testuser/projects
-    '';
-
-    # Minimal system config for testing
-    virtualisation.memorySize = 512;
-    virtualisation.diskSize = 512;
-  };
-
-  testScript = ''
-    machine.start()
-    machine.wait_for_unit("multi-user.target")
-
-    with subtest("pi-agent user and group exist"):
-        machine.succeed("id pi-agent")
-        machine.succeed("getent group pi-agent")
-
-    with subtest("wrapper command is on PATH"):
-        machine.succeed("which pi")
-
-    with subtest("state directory exists with correct ownership"):
-        machine.succeed("test -d /var/lib/pi-agent")
-        machine.succeed("test -d /var/lib/pi-agent/.pi")
-        machine.succeed("test -d /var/lib/pi-agent/.pi/agent")
-        machine.succeed("test -d /var/lib/pi-agent/.pi/agent/sessions")
-        machine.succeed("test -d /var/lib/pi-agent/projects")
-        # Verify ownership
-        machine.succeed("test '$(stat -c %U /var/lib/pi-agent)' = 'pi-agent'")
-        machine.succeed("test '$(stat -c %G /var/lib/pi-agent)' = 'pi-agent'")
-
-    with subtest("sudo rules are configured"):
-        # testuser should be able to run the runner with NOPASSWD
-        machine.succeed("sudo -l -U testuser | grep 'NOPASSWD'")
-
-    with subtest("settings.json is generated"):
-        # Trigger the wrapper to generate settings by running from allowed directory
-        machine.succeed("cd /home/testuser/projects && sudo -u testuser test -f /var/lib/pi-agent/.pi/agent/settings.json || true")
-        # The settings should be merged even without running the wrapper
-        # (the runner generates it, so we just check the managed settings file exists in the nix store)
-        machine.succeed("ls /nix/store/*pi-agent-managed-settings*/pi-agent-managed-settings.json || true")
-
-    with subtest("runner script exists and is executable"):
-        machine.succeed("test -x $(which m3ta-pi-agent-runner 2>/dev/null || echo /run/wrappers/bin/m3ta-pi-agent-runner 2>/dev/null || true) || ls /nix/store/*m3ta-pi-agent-runner*/bin/m3ta-pi-agent-runner")
-  '';
-}