In radar remote sensing, the Terahertz (THz) spectrum is presently being investigated worldwide with focus on short-range indoor and outdoor applications. The spectrum broadens the unmanned aerial vehicle (UAV) based synthetic aperture radar (SAR) applications to indoor room profiling with submm resolution and material characterization as many materials have unique fingerprints at this spectrum. SAR technique requires precise localization information of the mobile radar sensor, which in conventional SAR is achieved using an existing localization infrastructure, such as a global positioning system (GPS) and inertial measurement unit (IMU). For the indoor THz SAR, the GPS does not provide coverage in indoor complex environments, and also the state-of-art compact IMU does not provide the required sub-mm accuracy. These limitations can be overcome by utilizing an indoor localization system. Therefore, this paper presents an indoor THz simultaneous localization and mapping (SLAM) system. The system comprises of passive tags based radio frequency identification (RFID) localization system and SAR that provides the UAV localization and mapping of the in-room objects. Another challenge for the UAV based indoor THz SAR that is addressed in this paper is motion compensation (MOCO). At the THz, MOCO requires special consideration due to very small trajectory deviation is in the range of carrier wavelength. Therefore, to study the effects of the sub-mm translational errors, a testbed has been set up, and measurement results are presented in this paper along with the 3D electromagnetic simulation results for a carrier frequency of 275 GHz and bandwidth of 50 GHz. Further, to compensate these errors, the sub-mm localization system is used and the results are presented to validate the proposed solution for indoor THz SAR MOCO.