In order to improve the magnetic properties of Sm-Co nanopowder prepared using the low oxygen-induction thermal plasma (LO-ITP) process, the effect of heat treatment on the phase transformation and magnetic properties of Sm-Co nanopowder was investigated. Sm-Co nanopowder was annealed at 873, 973, 1073, and 1173 K. The X-ray diffraction results indicate that uniform Sm-Co nanopowder with a dominant SmCo5 phase can be prepared at annealing temperatures higher than 1073 K. The coercivity of the Sm-Co nanopowder annealed at 1173 K was measured to be 1.5 MA/m. The Sm-Co nanoparticles can be sufficiently oriented using an external magnetic field. Although perfect crystal orientation could not be achieved in the annealed nanopowder owing to necking, short-duration heat treatment promoted the formation of the hard magnetic phase and suppressed necking. The results of this study demonstrate the importance of the rapid heat treatment effect during particle formation in the ITP process for preparing dispersible Sm-Co nanoparticles with high coercivity and improved anisotropic magnetic behavior.