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Born in London, Freud is the daughter of painter Lucian Freud and Bernadine Coverley. She is also a great-granddaughter of Sigmund Freud and niece of Clement Freud. She travelled extensively with her mother as a child, and returned to London at the age of 16 to train as an actress at The Drama Centre.
She has worked in television and theatre as both actress and writer. Her first credited television appearance, though inauspicious, was as a terrified diner in The Bill in 1984, running frantically out of a Chinese restaurant after it had received a bomb scare. A year later she appeared as an alien in the Doctor Who serial Attack of the Cybermen. Her novels include the semi-autobiographical Hideous Kinky, which was adapted into a film starring Kate Winslet.
Freud was named as one of the 20 "Best of Young British Novelists" by Granta magazine in 1993. Her novels have been translated into 13 languages. She is also the co-founder (with Kitty Aldridge) of the women's theatre company Norfolk Broads.
In 2009, she donated the short story Rice Cakes and Starbucks to Oxfam's 'Ox-Tales' project, four collections of UK stories written by 38 authors. Her story was published in the 'Water' collection.
Freud has a sister, fashion designer Bella Freud, and a half-brother, Noah Woodman. Her uncle was the late politician Sir Clement Freud. She has two cousins in the media; Matthew and broadcaster Emma.