A quick and easy way to hide characters by setting attributes. If you want this to work with StreamingEnabled, you should handle the tagging of characters with a server script instead of with the provided snippet at the bottom.

HideCharacters.lua

--by @mvyasu
--4 May 2023

--A quick and easy way to hide characters by setting attributes
--To change whether characters are hidden do: game.Players:SetAttribute("HideCharacters", true)
--To exclude a player's character from being hidden do: game.Players.LocalPlayer:SetAttribute("NeverHideCharacter", true)

local CHARACTER_TAG = game:GetService("HttpService"):GenerateGUID()

local CollectionService = game:GetService("CollectionService")
local Players = game:GetService("Players")

do --handles the transparency of the characters
	local function cleanupObject(object: any)
		local t = typeof(object)
		if t == "function" then
			object()
		elseif t == "RBXScriptConnection" then
			object:Disconnect()
		elseif t == "table" or t =="Instance" then
			if object.Destroy then
				object:Destroy()
			else
				for _,child in pairs(object) do
					cleanupObject(child)
				end
				table.clear(object)
			end
		elseif t == "thread" then
			coroutine.close(object)
		end
	end

	local characterCleanupObjects = {}

	local function onCharacterAdded(character)
		if characterCleanupObjects[character] then
			return
		end

		--the or statement is needed because apparently :GetPlayerFromCharacter() has a race condition
		local player = Players:GetPlayerFromCharacter(character) or Players:FindFirstChild(character.Name)
		if player==nil then
			return
		end

		local objectsToCleanup: {[any]: any} = {}
		characterCleanupObjects[character] = objectsToCleanup

		do --handles when and what to set the transparency to
			local wasHiddenLastUpdate = nil
			local function shouldBeHidden(): boolean
				return Players:GetAttribute("HideCharacters") and not player:GetAttribute("NeverHideCharacter")
			end

			local function setDescendantTransparency(object: any, forcedTransparency: number?)
				if object:IsA("BasePart") or object:IsA("Decal") then
					object.LocalTransparencyModifier = forcedTransparency or (if wasHiddenLastUpdate then 1 else 0)
				end
			end

			local function setCharacterTransparency()
				for _,descendant in character:GetDescendants() do
					setDescendantTransparency(descendant)
				end
			end

			local lastForceTransparencyConnection = nil
			local function onHiddenStatusChanged(isCharacterHidden)
				if player~=Players.LocalPlayer then
					return
				end

				if lastForceTransparencyConnection then
					lastForceTransparencyConnection:Disconnect()
					table.remove(objectsToCleanup, table.find(objectsToCleanup, lastForceTransparencyConnection))
				end

				if isCharacterHidden then
					local newForceTransparencyConnection = game:GetService("RunService").RenderStepped:Connect(setCharacterTransparency)
					lastForceTransparencyConnection = newForceTransparencyConnection
					table.insert(objectsToCleanup, newForceTransparencyConnection)
				end
			end

			local function updateCharacterTransparency(forceUpdate: boolean?)
				local shouldHideCharacter = shouldBeHidden()
				if shouldHideCharacter==wasHiddenLastUpdate and not forceUpdate then
					return
				end

				if wasHiddenLastUpdate~=shouldHideCharacter then
					onHiddenStatusChanged(shouldHideCharacter)
				end

				wasHiddenLastUpdate = shouldHideCharacter
				setCharacterTransparency()
			end

			updateCharacterTransparency()
			table.insert(objectsToCleanup, {
				character.DescendantAdded:Connect(setDescendantTransparency),
				character.DescendantRemoving:Connect(function(descendant)
					setDescendantTransparency(descendant, 0)
				end),
				player:GetAttributeChangedSignal("NeverHideCharacter"):Connect(updateCharacterTransparency),
				Players:GetAttributeChangedSignal("HideCharacters"):Connect(updateCharacterTransparency),
			})
		end
	end

	CollectionService:GetInstanceAddedSignal(CHARACTER_TAG):Connect(onCharacterAdded)
	for _,character in CollectionService:GetTagged(CHARACTER_TAG) do
		task.spawn(onCharacterAdded, character)
	end

	CollectionService:GetInstanceRemovedSignal(CHARACTER_TAG):Connect(function(character)
		local objectsToCleanup = characterCleanupObjects[character]
		if objectsToCleanup then
			cleanupObject(objectsToCleanup)
			characterCleanupObjects[character] = nil
		end
	end)
end

do --handles tagging the player with a tag defined by CHARACTER_TAG
	local function onCharacterAdded(character)
		CollectionService:AddTag(character, CHARACTER_TAG)
	end

	local function onPlayerAdded(player)
		player.CharacterAdded:Connect(onCharacterAdded)
		if player.Character then
			task.spawn(onCharacterAdded, player.Character)
		end
	end

	Players.PlayerAdded:Connect(onPlayerAdded)
	for _,player in Players:GetPlayers() do
		task.spawn(onPlayerAdded, player)
	end
end