For some reason, I decided to update the Windows Server 2012 R2 template I had. So AFTER 5 iterations on Update and restart, I thought I was done. But no Microsoft had to do something to make my life a hell.
I tried different combinations to Install SQL Server, but it will always fail. This time before upgrading the template, I decided to create a snapshot (should do it more often).
I decided to create a clone of the state before i applied the windows updates. And BEHOLD, SQL 2014 installed without a hitch.
At least that confirmed what went wrong!.. It was one of these pesky updates...
Now, how to solve the problem. As it is obvious, it would take far more time to install each update for it self and try to install SQL server. But as it happens I was not alone with this little problem.
As it turns out the problem is caused by the
Update 1 pack. The solution as it turns out is quite simple:
Find the folder
Default. It might be hidden, so might need to unhide it first.
Right Click → Click
Security Tab→ Click
Replace all child object permissions entries with the inheritable permissions entries from this object
Now you can install SQL Server 2014 on Windows 8.1 Update 1 and Windows Server 2012 Update 1.
Although I don't think this error occurs when you have Windows 8.1 and Windows Server 2012 R2 with Update 1 pre-installed from the factory. It only occurs when updated via Windows Update.